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More and more investors have been leaving the buy-to-let (BTL) sector and opting for alternative investments like HMOs. This is often to generate better cash flow and maximise rental yields. And there are a number of other benefits for this form of investment as well.
Here we’ll talk about the reasons behind this growing trend and tips for how to get started in HMOs after investing in single BTLs!
Investors Leaving the BTL Sector
The trend of landlords in the BTL sector making the change to HMOs is expected to continue as these investors in particular have had their returns hit hard in recent years. The value of buy-to-let lending has even fallen over the last two years, dropping from £9.7 billion in the final quarter of 2022 to £4.3 billion in the first quarter of 2024.
According to analysis by Finder, annual returns for a landlord taking out a BTL mortgage on the average UK property was more than £4,000 lower in April 2024 compared to the same month in 2020. This is a whopping 45% drop!
Higher costs, especially mortgage rates, are predominantly impacting this. In June 2024, the average rate for a two-year buy-to-let mortgage with 75% loan-to-value sat at 4.73%, which is well above the historic lows from before the onset of the COVID-19 pandemic.
At the same time, HMOs can be one of the most profitable forms of residential property investment. However, keep in mind that a number of factors will ultimately impact the success of your investment, and there are a number of things you need to be aware of when getting involved with HMOs!
5 Tips for Getting Started in HMOs
Investing in HMOs is different from single buy-to-lets. There are additional things you need to be aware of, and how you approach your investments should be different as well. So, here are some of my top tips to help you make the jump from investing in single buy-to-lets to HMOs!
1. Understand the additional legislation & legal obligations.
This isn’t the most exciting part of HMO investment, but you must understand your additional legal obligations and legislation as a HMO investor.
So, spend time learning about this and getting it right. When it comes to investing in HMOs, there’s so much you need to adhere to. Because of this, it’s crucial to learn your obligations before getting started, particularly as getting this wrong can have big consequences!
2. Figure out how to appraise and find HMO deals.
You’ll need to figure out what type of HMO, property size and location is best for you and matches your investment goals. Being able to source and acquire good HMO deals is essential to getting started in this type of investment.
Start by learning how to build relationships with agents, find motivated sellers and pipeline deals. And you need to be able to appraise deals effectively as well! And this is different to how you’d appraise single BTLs as there is more you need to consider when it comes to HMOs.
3. Find additional ways to raise funding.
Investing in HMOs is more capital intensive, so you need to consider how you’ll fund your HMO properties as well. You might have some cash saved up to get you started and you may be utilising lending from a bank. HMO mortgages are specialist products, so there are additional things you need to be aware of.
We’re almost always going to run into challenges with not having enough cash for HMO investment. So, understanding how to raise private finance and recycle capital are key ways for investors to be able to fund their HMO portfolio. And you may want to consider ways to invest with little to no capital!
4. Learn about the ins and outs of HMO refurbishments.
Another key area is understanding what’s involved in planning and undertaking a refurbishment for a HMO, and this includes transforming a property, setting budgets, putting contingencies in place, estimating timeframes and mitigating risks. Look at what the competition is doing and figure out what is appealing to your target tenant.
This is all crucial in making sure that the end result of your refurbishment is as close to where you want and need it to be. Always proceed with caution in the planning stages, but don’t forget to build some contingencies to help prepare you for mistakes or anything that might crop up!
5. Don’t underestimate the challenges of HMO management.
As there are more tenants in a HMO property than a single buy-to-let, property management for HMOs naturally takes more effort and time. Managing a property and tenants can be one of the most challenging areas of HMO investment!
You’ll need to always keep up with changing compliance and figure out how to communicate with tenants effectively. This isn’t for everyone, so you’ll need to figure out if you’ll self-manage or hire an experienced managing agent.
More BTL investors will likely continue to be interested in less traditional forms of property investment, including HMOs. But if you’re looking to make the switch, you’ll need to be prepared. Do your research and thorough due diligence to make sure you get started with investing in HMOs the right way!
If you’ve decided to start investing in HMOs and want to learn all of the technical bits to start, scale and systemise your portfolio, sign up for The HMO Roadmap! And for extra support from fellow investors, join us over in The HMO Community Facebook Group.
About the Author:
Andy Graham is the founder and the lead trainer at The HMO Roadmap! He is also the co-founder of The HMO Mastermind, writes as a regular columnist in different magazines about a variety of HMO topics and is the host of The HMO Podcast! Follow Andy on Instagram!